Presenting a live 90-minute webinar with interactive Q&A Carve-Out Transactions: Strategies for Due Diligence and Structuring the Deal WEDNESDAY, JUNE 28, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Jason C. Breen, Partner, Goodwin , Los Angeles Charles J. Morton, Jr., Partner, Venable , Baltimore Rita-Anne O'Neill, Partner, Sullivan & Cromwell , Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Carve-Out Transactions: Strategies for Due Diligence and Structuring the Deal June 28, 2017 Strafford Web Seminar Rita- Anne O’Neill Charles Morton Jason Breen
Carve-Out Transactions – Latest Trends 6
What Is a Carve-Out Transaction? A carve-out transaction is a sale of a business line, division or portion of a larger company. By their nature, carve-out transactions combine many aspects of public company and private company M&A and also raise their own set of unique issues. Key Attribute of Carve-out Transactions: Seller remains an operating business once the transaction has been completed. 7
ABA Carve-Out Transaction Deal Points Study The M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association’s Business Law Section is in the process of a new Deal Points Study on carve-out transactions expected to be released by the end of 2017. The Deal Points Study includes analysis of approximately 120 carve-out sale transactions that were announced from January 1, 2015 through December 31, 2016. The carve-out transactions included in the Deal Points Study are public deals with transaction values in excess of $10 million where the ultimate parent of the Seller is a U.S. public company, the Seller was not in apparent financial distress at the time of the announcement of the transaction and the Seller did not retain any equity interest in the carved out business sold. The Deal Points Study excludes agreements that expressly contemplate that the Seller will obtain stockholder approval prior to consummation of the transaction. Note that the data from the Deal Points Study referenced throughout this presentation is preliminary. Also note that the data from the Deal Points Study only covers public deals and the data may be different for private deals. 8
Carve-out Transactions – Structure Carve-out transactions can take the form of asset purchases in which the S eller identifies and sells or “carves out” specific assets; or the form of an equity purchase in which the Seller sells equity in one or more of its subsidiaries. Carve-out transactions can also combine the two structures, for example, when the Seller sells both assets and equity in subsidiaries, or when the Seller transfers assets in a pre-closing restructuring to a subsidiary and then sells that subsidiary to a Buyer. Even with a transaction structured as an equity purchase, it still may involve an asset sale in connection with a restructuring. Practitioners advising a Seller should discuss very early on in the process whether a pre-signing or a pre-closing restructuring, if any, is desirable. Structure should also take into account input from tax advisors. 9
Carve-Out Transactions – Unique Legal and Business Considerations 10
Consideration Issue of valuation gaps may be amplified in a carve-out transaction. There may not be stand-alone financials relating to the carved out business. To bridge the valuation gap, the parties may agree to staged payments and/or earnouts. Earnouts often address specific concerns and risks of Buyer in assuming the carved out business. For example, milestones based on satisfying integration metrics, sales targets and/or regulatory approvals. Deal consideration may include mix of stock and cash, which should be considered in the structuring of the transaction. Parties should consider the scope of the retained liabilities by Seller and post-closing recourse of Buyer against Seller in determining the deal value and the triggers for payment of the consideration. 11
Transferred Assets/Liabilities A key aspect of structuring a carve-out as an asset purchase or with an asset purchase component is identifying the specific assets to be transferred and the liabilities to be assumed. Describe specifically? List and/or describe specific assets for purchase in an attached schedule. This may be tedious and creates the risk that an asset related to the carved out business will be omitted. Describe generally? Describe the assets to be purchased conceptually. Flexible definitions ensure the intended assets will be included in the purchase agreement. However, the added flexibility leaves room for debate as to whether a specific asset is included in the conceptual definition or should rightfully remain with the Seller. Pair conceptual description of assets with non-exclusive lists of particularly important classes of assets to be purchased. 12
Transferred Assets/Liabilities (con’t) Example standards used to define conceptually described transferred assets: Related to another transferred asset or the carved out business. Exclusively used in the carved out business. Primarily used in the operation of the carved out business. Necessary to the carved out business. Used in the operation of the carved out business. Primarily related to or associated with the carved out business. 13
Transferred Assets/Liabilities (con’t) Example standards used to define conceptually described excluded assets: Liquid assets such as cash, tax refunds, accounts receivable, funds owed under outstanding hedging arrangements, etc. Equity of subsidiaries. Corporate records of Seller and Seller parent. Insurance policies. Assets, rights and interests in employee benefits plans. Rights under Seller and Seller parent trademarks. Assets unrelated to the carved out business. Commingled contracts. 14
Transferred Assets/Liabilities (con’t) Assumed liabilities by Buyer specifically articulated, with all other liabilities retained by Seller. Liabilities listed on a schedule. Liabilities relating to transferred assets following the closing. Liabilities arising from the sale of products following the closing by Buyer. Assumption of executory liabilities arising following the closing under the transferred agreements (excluding liabilities relating to breaches or events that occurred prior to or at the closing). If there is a working capital adjustment, current liabilities. Retained liabilities specifically articulated, with all other liabilities assumed by Buyer. 15
Transferred Assets/Liabilities (con’t) Example standards used to define conceptually described retained liabilities: Liabilities relating to pre-closing and transaction-related taxes. Liabilities relating to present or former employees of Seller. Liabilities arising under employee benefit plans of Seller. Liabilities arising pre-closing or relating to an event occurring pre-closing. Liabilities relating to excluded assets. Liabilities associated with Seller indebtedness. Liabilities arising from Seller's breach of representations, improper performance or defective products/services. Liabilities arising from litigation for pre-closing actions. Seller accounts payable. Liabilities unrelated to the carved out business. Liabilities arising from Seller's failure to comply with contracts or applicable law. Liabilities for environmental claims. Liabilities owed to Seller’s directors and officers. 16
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